It is now almost imminent that Lehman Borthers will join the growing list of victims from the sub-prime crisis. The NYT reports that ailing Wall Street firm is considering a proposal to split the bank into a "good" bank and a "bad" one. The proposal would essentially involve placing about $30 billion of troublesome commercial mortgages and real estate that it owns into a new publicly traded company — the "bad" bank. The rest of Lehman — the "good" one — would then be able to carry on with the help of a cash infusion from one or more investors.
The logic behind the proposal - NYT writes, "Creating the separate company, the thinking goes, would strengthen the confidence of people who do business with Lehman every day — other banks, hedge funds and institutions like pension funds — thereby encouraging them to continue doing business with the firm. Shareholders, who would own shares of both the real estate portfolio and the new unencumbered Lehman, could bet on whether the commercial real estate market recovers or gets worse and sell its "bad bank" shares".
The logic is self-evident. The only problem is that in the real world, it rarely ever gets translated into results. Something else happens. Stripped off all the jargon, is this not precisely the definition of "asset stripping"? Privatizing the gains, while socializing the losses? The "smart" investors and promoters get away with their profits intact, leaving the "dumb" others to shoulder the debt burdens? Or set the stage for the private equity horde to swoop down and takeover the weak assets at knock away prices, and then experiment with even more impenetrable and complex financial engineering to give the illusion of revival before bundling it off on unsuspecting investors? Have not seen it happen many times before? Where are the regulators? Let us wait and see.
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